Refiners Are Printing Money As Diesel Crack Soars

Diesel prices have been supercharged this summer, but as Bloomberg's Jack Wittels warns, the moves seem out of kilter with the relatively mundane fundamental drivers, creating the risk of a correction. Then again, it could just be a repeat of last year when diesel prices went suborbital due to lack of refining capacity, and led to a cash bonanza for refiners.

Benchmark diesel futures in northwest Europe are currently worth about $35 more than ICE Brent, more than double the seasonal norm. This price difference -- known as the diesel crack, or margin -- has been on an almost solid bull-run since late May.

As Wittels notes, such a dramatic price move, up or down, is extremely rare; not even Covid triggered this kind of swing in Northwest Europe’s diesel margins. Excluding last year -- when Russia began its invasion of Ukraine -- there hasn’t been anything like it in at least a decade.

The forces behind this upward surge come more from the supply than the demand side. However, key factors, such as refinery issues and OPEC+ cutting output, essentially fall into the category of ‘normal problems’ when it comes to oil markets.

To be sure, this rally is beyond normal and it has taken place despite demand having “been weak, with OECD diesel usage falling 240k b/d y/y during Jan-Jun and China’s appetite likely unchanged y/y,” according to Bank of America, although one look at diesel and one would leave with just the opposite conclusion!

Still, Wittels cautions that the bullish narrative is starting to look stretched. Money managers reduced their net-long positions in ICE Gasoil futures, albeit from a high base. And after jumping above $40 a barrel, the ICE Gasoil crack has now come off to about $35.